“How much have homes appreciated in value where you live?” I asked.

“Well, I sold a home in early 2000 for about $180k” he started. “Now that same home, with maybe $300k worth of upgrades would go for $700k-$800k”

Uh oh, I thought strike one

I proceeded to tell him about Bend and how at our height, the median was around $400k.

“What is it now?” he asked.

“Well, I think last month the median was around $180k”

The businessman sat there, mouth agape, stunned.

“Glad that isn’t happening up north, I’d be in trouble.  I think homes in Canada are going to just level off in large YoY appreciataion because they were so cheap before”

strike two I thought.

“Well why couldn’t it happen with Canada also?” I asked directly.

He looked at me, and with conviction, said “Well, Canada is different…” and proceeded to tell me how.

Strike three I thought this thing is toast

And then today I read this article from mish

…

Imagine, 68% of your disposable income being spent on housing costs with the remaining disposable income likely being spent on their favorite Top Ramen and KD dinners. This is insane as well as unsustainable. It’s funny that many Canadians seems to think that the 49th parallel has magically created immunity from a housing bust that in their minds is exclusive to the United States. I can’t tell you how many times friends and acquaintances say that Canada’s banks are sound and there was no sub-prime lending and it just can’t happen here. I’m quick to remind them that the loss of one income from a two income family will in essence convert a low credit risk to a poor credit risk akin to that of a sub-prime borrower real fast. Now, multiply this my hundreds of thousands if not millions of borrows and we too have a major problem in Canada no different from that of the US. Wishful thinking really. The proof’s in the pudding and this puddings going to bring a dose of reality to those that are living in fantasy land, way beyond their means and who apparently have missed the global financial crisis that’s been gaining traction and intensity since August 2007.

We’re not only “Hosers” in Canada but we’re royally Hosed as well!!

Robert Clegg, JD, LL.M
Ombudsman, University of Calgary
Calgary, Alberta

Now if only I could figure out how to short the housing mess that we all know is coming to Canada, I’d be insanely rich.

-peace

Now for a long while (over 6 years) I have been bearish on RE. For those who may not understand the term bearish, it pretty much means that I think that purchasing a property has NOT been a good move. But things are changing.

Take these homes for example.

Some things I know after researching the homes using DIAL and the CLERKS records are.

• They are both short sales
• They are right next to each other
• They were built for $106k in 1996.
• Annual tax is around $2k

Now how can we distinguish if this is a good deal? Well lets lay some ground work.

I currently rent a crappier home than either of these for $775 a month. So if my net monthly cost is less than $775 a month, this tells me that I should consider “buying” a home. So I go to bankrate.com and open up their mortgage calculator.

The homes are asking $89k, and I would put down roughly $20k in cash. Making the loan amount $69k. And with a 15 year fixed and good credit, you should be able to pull close to 4.5% on the interest. You can see that the monthly payment is then $527.85. This may lead you to think “Jared, you would be saving $250 dollars a month, what is stopping you?” and that is a reasonable question.

If you look up the properties in DIAL, you will see that the annual taxes due on the homes is roughly $2k. Dividing that by 12 gives you your monthly tax rate at $166 a month.

$527.85 + $166 = $693.85

Monthly Mortgage Payment + Monthly Tax Rate = $693.85

Which doesn’t look quite as attractive, but is still interesting. Finally you should calculate maintenance costs. Which most people say the bare minimum is 1% of the purchase price. Realistically, I think we probably should go with 2-3% of the purchase price for these older homes, but for the sake of this post, we will just use 1%. 1% of $89k is…$890 which we will divide by 12 to get our monthly maintenance cost. $74.16.

$527.85 + $166 + $71.16 = 765.01

Monthly Mortgage Payment + Monthly Tax Rate + Monthly Maintenance Cost = $765.01

Yes, this looks really attractive, but I also want to add the transaction cost (The amount you pay in fees to the RE agent, Mortgage broker). I will have to guess a little bit here, if a real estate agent can shed some light I would appreciate it. So lets say that the total fees paid, is roughly 7% of the purchase price.

$89k x .07 = $6230

Now divide $6230 by how many months you will have the mortgage loan for. In our case, it is 180 months.

$6230 / 180 months = $34.61

Keep in mind that if you roll any of the fees into the loan, then you will pay interest on them.

$527.85 + $166 + $71.16 + $34.61 = $799.62

Monthly Mortgage Payment + Monthly Tax Rate + Monthly Maintenance Cost + Monthly Transaction Cost = $799.62

This is the basic math I use to figure out if I really am getting a deal or not. The interesting thing here, is that an investor could potentially buy this place. I mean they could maybe rent it for $850. So they would make ($577.85 x 12) $6934.12 annually on a $89k purchase. Roughly 7% +/-. Not a terrible investment using this math.

I did call about these homes, supposedly they have several offers. Thing is, with over 400 Notice of Defaults in January, we all know that there is plenty of inventory. Meaning that there is absolutely no freakin rush to “buy” a home.

Anyway, just some thoughts for people to consider before they purchase and please comment if I missed something.

Speaking of shadows, I think the word “shadow” epitomizes the MSM (Main stream media) and even the local boys (IE, Bulletin, KTVZ, etc). It is why I thoroughly inspect every nugget of supposed news that is reported. For there exists something at every major news corporation that lurks in the shadows. Just like shadow statistics, shadow inventory, shadow tax, this one is known as shadow opinion. The thought came to me a while back when reading an OP-ED piece from the Bulletin. Some where along the line, the newspaper came up with the idea that if they put the word “Opinion” in the title, it would let the reader know that the article was the opinion of the writer. Also implying to us, the readers, that the rest of the written document is news. In actuality and truth, we should know that the news is all opinion. The paper, magazine, news channel or what have you has an opinion about all things. And should you listen closely on when, if, or how things are published, you can hear the true “Voice” of any given media outlet.

But I think Duncan over at BMW is right in his ongoing subtle analysis of the MSM. The bloggers seem to have an edge on them. At least they have a much tighter voice. Usually being written by one person, or at most, a handful of people. And about a specific topic no less. Plus the scope and draw of the content is on the ground and global. As these folks can be or are, literally, all over the world. Instead of watching or reading the MSM as it regurgitates the same garbage over and over again, my opinion (heh) is that listening to the voices of many bloggers of all creeds is a much better representation of actual News.

Finally, it was funny this morning, because as I was sitting at breakfast today clicking through my RSS reader. I pulled back from the individual articles, and took a long look at all the blogs that I love to read. Suddenly an image of my father sitting at my childhood breakfast table thumbing through his paper filled my thoughts. This struck me, because I know that this will be an image that my daughter will never have.

Its ok, I was there too. For a long time, I hoped and schemed that I could own a home with some property some day. But after spending a exorbinate amount of time (some may even call it obsessing) researching Real Estate, I know that it is an impossible dream. And I see the world, and especially the United States of America very, very differently.

“Bah” you say “I own my home! And I am damn proud of it!”

And to this response, I would argue that there is already a profusion of subterfuge about the very definition. So first we have to quantify what home ownership actually is.

1. Is home ownership an interest only loan, where the borrower takes out a  125% LTV suckers loan in order to not have to put any cash down? (On their dream property of course)
2. Is home ownership a 30 year fixed rate mortgage. With the stability in knowing what your monthly is never going to change over the life of the loan?
3. Or is home ownership when you finally pay of the mortgage, and you owe nothing more to the lender?

(I realize that there are many other financial instruments that we could list concerning housing. But for the sake of argument, I believe that these three represent a solid scale on which to reflect)

So back to the question at hand. Which of these best represent the term “Home Ownership”?

Now the first one is fairly easy to rule out these days. Most everyone reading this has seen these loans explode. Either by watching family or friends, or experiencing it themselves. And so lets just scratch it off the list.

The second one, is probably what the American populace would define as home ownership. But for now, everyone who is reading needs to understand that when you take out a loan on a home, it is actually the bank’s and not yours. So scratch number two.

At this point, most folks would settle on the definition of home ownership. Which is when you own the deed flat out, owing nothing to any lender. But if that were the case, then this post would be over. And my take is that most people forget about one very important aspect.

Taxes.

Yeah, good ol’ taxes.

And with taxes in mind, here is where I reason that you never truly own your home. That at any point, the goverment can and will come and weasel your property away from you. And don’t give me the I have rights bull crap. These illusionary rights only go as far as their (the government’s) need. And if the need is great, the illusion falls right along with your rights.

But the land, even despite the taxes, the land is the real value!

Heh, right, the land. Is it on anything of value that can be sold on the world stage? If not, then I really don’t want the “value”. Especially the taxes that come with it. It is also my belief that the government is going to do whatever it can to increase taxes over the next decade (just the next decade?). I mean, face it, our nation is broke. We owe a crap load, to a lot of people.

But don’t worry, it is nothing to be afraid of, you just need to understand it. Once you realize that with most current home purchases you are only buying the “right” to further taxation, you are good.

I mean, think of it this way. Do you think I sat there after my brother died thinking

“Man, I am glad that Jaye got to see our new place before he passed away!”

Hell no!!!

I was happy that we had the money to make memories with him by going on trips and other awesome adventures through out his life.

And so the target must be ”buying” a home when it becomes less expensive than renting while projecting future tax increases into the model. Along with the understanding that a home, in an of itself, is a depreciating asset at best. And at worst, a depreciating liability when the note is held by a lender. At some point, you will have to invest your reserves into either fixing and maintaining, or all together rebuilding the home (disturbingly similar to a car, no?). And even with this, you must know emotionally that it will never be truly yours. And this is a good thing.

I personally do not want to be owned by my things. I will not sacrifice myself and my families’ opportunities in order to make the pipe dream of home ownership into a ball and chain reality. I plan on using my surplus cash to MAKE MEMORIES!!! That is the real value.

Despite these current beliefs, I am always open to new ideas. Because you can’t learn something new if you are not willing to listen right? And I appreciate people’s thoughts, even if I don’t always agree. So I would be happy to hear other’s perspective on this. And so I leave you with this.

“Why do you personally want to own a home?”